What is Technical Analysis?
What is Technical Analysis? Part Art / Part Science
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Technical Analysis is the study of historical price charts. Analysts are searching for subjective and objective events which have an observable historical influence on price.
1
What is Technical Analysis? ●
All financial analysis is focused on forecasting ○ Do I expect price to rise or fall? ○ Do I expect to get positive yield from my investment in this security?
2
Forecasting vs. Predicting Forecasting
Predicting
“Making a forecast typically implies planning under conditions of uncertainty. It suggests having prudence, wisdom, and industriousness, more like the way we now use the word foresight”
“Prediction is an attempt at certainty.”
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Eg. MSFT will be at $XXX by the end of 2017.
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Measuring a target from a chart pattern is a prediction.
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Some sub-fields of Technical Analysis are focused on Prediction. Hard to quantitatively test since predictions are specific to the security on which they are applied.
Giving expectations in terms of general direction “Up”, “Down”, “Sideways” By virtue leads to a recommendation “Buy”, “Sell”, “Hold”
3
What is Technical Analysis? ●
Fundamental Analysis uses valuation.
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Using evidence to support theories.
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Technical Analysis uses historical data.
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Making decisions based on objective analysis.
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Quantitative uses Technical and Fundamental fused into quantifiable Mathematical models.
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Traditionally focused on a single chart.
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Modern TA considers many Inputs.
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A field of probabilities and likelihoods.
4
What is Technical Analysis? ●
Each price is where sellers and buyers agree.
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The primary goal of every Technical Analyst is to identify the trend as soon as possible, trade with it, and make money.
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Charts reflect reality at a point in time.
5
What is Technical Analysis? Financial Analysis
Technical Analysis
Fundamental Analysis
Trend
Oscillators
Breadth
Charts
Momentum
Relative Strength
Patterns
Cycles
Quantitative Analysis 6
Basic Beliefs of Technical Analysts ●
That markets trend
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Prices are non-random ○
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Price is determined by the interaction of Supply and Demand ○
●
Change in S&D is based on human decisions. Those humans are processing information and making decisions based on fear and greed.
Price “discounts” everything ○
○
●
TA’s expect history to repeat, or at least rhyme. Patterns form in markets. People’s interpretation and reactions are based on psychology and often repeat.
Trends and Patterns are Fractal ○
Patterns that are evident on a monthly chart will also be seen on an hourly chart.
Not just the information but the interpretation of that information.
7
● ●
Technical Analysis is the study of historical price charts. Analysts are searching for subjective and objective events which have an observable historical influence on price.
1
What is Technical Analysis? ●
All financial analysis is focused on forecasting ○ Do I expect price to rise or fall? ○ Do I expect to get positive yield from my investment in this security?
2
Forecasting vs. Predicting Forecasting
Predicting
“Making a forecast typically implies planning under conditions of uncertainty. It suggests having prudence, wisdom, and industriousness, more like the way we now use the word foresight”
“Prediction is an attempt at certainty.”
●
●
●
Eg. MSFT will be at $XXX by the end of 2017.
●
Measuring a target from a chart pattern is a prediction.
●
Some sub-fields of Technical Analysis are focused on Prediction. Hard to quantitatively test since predictions are specific to the security on which they are applied.
Giving expectations in terms of general direction “Up”, “Down”, “Sideways” By virtue leads to a recommendation “Buy”, “Sell”, “Hold”
3
What is Technical Analysis? ●
Fundamental Analysis uses valuation.
●
Using evidence to support theories.
●
Technical Analysis uses historical data.
●
Making decisions based on objective analysis.
●
Quantitative uses Technical and Fundamental fused into quantifiable Mathematical models.
●
Traditionally focused on a single chart.
●
Modern TA considers many Inputs.
●
A field of probabilities and likelihoods.
4
What is Technical Analysis? ●
Each price is where sellers and buyers agree.
●
The primary goal of every Technical Analyst is to identify the trend as soon as possible, trade with it, and make money.
●
Charts reflect reality at a point in time.
5
What is Technical Analysis? Financial Analysis
Technical Analysis
Fundamental Analysis
Trend
Oscillators
Breadth
Charts
Momentum
Relative Strength
Patterns
Cycles
Quantitative Analysis 6
Basic Beliefs of Technical Analysts ●
That markets trend
●
Prices are non-random ○
●
Price is determined by the interaction of Supply and Demand ○
●
Change in S&D is based on human decisions. Those humans are processing information and making decisions based on fear and greed.
Price “discounts” everything ○
○
●
TA’s expect history to repeat, or at least rhyme. Patterns form in markets. People’s interpretation and reactions are based on psychology and often repeat.
Trends and Patterns are Fractal ○
Patterns that are evident on a monthly chart will also be seen on an hourly chart.
Not just the information but the interpretation of that information.
7
